Economy

Good morning. The markets loved Thursday’s inflation report, and we did too. But we think the inflation fight is far from over. The fight over FTX is going to run for a while, too. Our thoughts on both below. Email us: [email protected] & [email protected]. Inflation, cooler, but mostly the sameThe stock market doesn’t rise 6 per cent in a day for no reason. Yesterday delivered one: decisively cooler inflation numbers that inspired hope the US Federal Reserve might back off and finally let a market bottom form. The CPI report is indeed confirmation that the disinflationary trends visible everywhere from housing to job cuts is real. As a result, markets have lopped off a lot of inflation upside risk. Futures traders’ implied expectations for where rates will be in late 2023 fell hard, while expectations for the next few months dipped only modestly. The market thinks higher-for-longer rates are less likely today than they did on Monday.What did the CPI numbers actually say? Last month, we offered four predictions, based on conversations with inflation specialists, for the October inflation data that have just come out (recall that the key services inflation categories are, from most to least important, shelter, medical care and transportation):Core goods (ex food and energy) would start deflating.Transportation services would stay volatile, but begin to gradually moderate as airfares settled down.An annual update to the health insurance data used to price medical services would flip it to an inflation drag.Shelter would stay pretty hot.Yesterday’s inflation numbers delivered on all four counts. The chart below sums up. The top four rows are for October, the bottom four for September:Core goods and medical services prices are falling, while transportation prices are growing a bit less quickly. Shelter was a bit trickier this month. The high-level point is that it decelerated slightly, but there is a complication. As you can see in the chart above, the shelter category accelerated in October. But under the hood, the two most influential subcategories — rent (down from 0.8 per cent to 0.7 per cent) and owners’ equivalent rent (0.8 per cent to 0.6 per cent) — eased. The culprit was explosive acceleration in one little-watched subcategory: hotels (up 5.6 per cent in one month!). This looks like noise, though. As Omair Sharif of Inflation Insights explained to us, the hotels component doesn’t tell us much about shelter:What really is in CPI is hotels near vacation spots, ski towns, beaches, things like that. Not the hotel down the road from your parents’ house. If there’s volatility around resort pricing, it’ll show up in hotels.And with the overall hotel index right on its pre-coronavirus pandemic trend, we aren’t terribly worried.Stepping back, yesterday’s report has not changed the picture much. Inflation has peaked; it is coming down; how fast it comes down hinges on shelter. And shelter prices are likely to come down slowly. As we’ve noted previously, there is a catch-up effect in rent levels that may well lift inflation for several months to come. We’re glad inflation is not running wild, but the central hypothesis remains the same: inflation prompts the Fed to keep rates restrictively high for a while, causing a recession. What happens on the margin — inflation falling a bit more briskly, rates rising more gingerly — still matters. But the broader picture — hot inflation, punishing rates — matters more. (Ethan Wu)FTX, againFrom a Reuters story, published yesterday, about FTX and its chief executive Sam Bankman-Fried:This May and June, Bankman-Fried’s trading firm, Alameda Research, suffered a series of losses from deals, according to three people familiar with its operations . . . Seeking to prop up Alameda, which held almost $15 billion in assets, Bankman-Fried transferred at least $4 billion in FTX funds, secured by assets including FTT and shares in trading platform Robinhood Markets Inc, the people said . . . A portion of these FTX funds were customer deposits, two of the people saidHere is the Wall Street Journal, also yesterday, on the same topic:Crypto exchange FTX lent billions of dollars worth of customer assets to fund risky bets by its affiliated trading firm, Alameda Research . . . Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes . . . All in all, FTX had $16 billion in customer assets, the people said, so FTX lent more than half of its customer funds to its sister company Alameda.I don’t know if it is legal for a person to transfer customer funds from their crypto exchange to their hedge fund, because I don’t know what a crypto exchange is, according to the laws of the Bahamas, the Cayman Islands, the Forest Moon of Endor or wherever the entities involved are domiciled. Undoubtedly, though, such a transfer is wildly risky. It takes assets out of an institution that has on-demand liabilities and replaces them with an IOU. This raises the risk of a bank run. What is more, as the Reuters story has it, that IOU was largely collateralised by FTT, a token that the lender invented. That is insane in so many ways I don’t have space to lay them out here. Finally and obviously, such a transfer implies icy disregard for the exchange’s customers. Bad stuff. But it does help to explain what is going on. FTX can’t meet customer withdrawals because it gave customer assets to Alameda and can’t get them back, at least not in a liquid enough form to be useful. But this simple story is muddled by another account released yesterday. It came by Bankman-Fried himself, using Twitter. It contained two material claims. The first:FTX International currently has a total market value of assets/collateral higher than client deposits (moves with prices!). But that’s different from liquidity for delivery — as you can tell from the state of withdrawals.In other words FTX is solvent (in the limited sense of having enough assets to make its customers good eventually) but not liquid (in the sense of having enough easy-to-sell assets to make customers good soon). It just needs enough time to sell some assets that are hard to sell. And what mistake led to this liquidity problem? Not a huge transfer of assets to a hedge fund. Instead, FTX’s customers were much more levered than Bankman-Fried knew. That’s the second material claim:. . . a poor internal labelling of bank-related accounts meant that I was substantially off on my sense of users’ margin. I thought it was way lower.Users’ leverage was 1.7, not 0 as he had thought, Bankman-Fried said (this must be on some sort of net basis, because obviously lots of FTX clients had leverage, leverage is something FTX sells). So for every $1 in customer deposits, customers borrowed aggregate $1.70 from FTX. And the result was that there wasn’t enough liquidity left to meet the rush of withdrawals late last week. But why would customers having leverage — owing FTX money, in short — cause a liquidity problem in the face of mass withdrawals? The only way I can think of is if the loans the exchange provided to customers were funded by loans from someone else, and that someone else wanted their money back at the same time customers did.This could happen, but if it is what happened, Bankman-Fried’s mistake looks much dumber. He is suggesting he owed multibillion-dollar callable loans to a third party, and he didn’t know, even approximately, how big they were. We still have more questions than answers. To wit:Can the news reports and the Bankman-Fried Twitter thread both be true? Yes, in a narrow sense. It could be that FTX is solvent and illiquid, and that customer leverage made meeting withdrawals trickier than it otherwise would have been, and that FTX lent billions in customer assets to Alameda. It’s just that FTX is a lot less solvent and liquid than it would have been if it hadn’t made that loan. Of course, if Bankman-Fried wrote that long thread about being more transparent and how sorry he is, and just decided not to mention that he also lent billions of dollars of client assets to his hedge fund in return for the worst imaginable collateral, then he is a jerk of world-historical proportions. But that is a different issue.Isn’t it odd that FTX says it is solvent (in the limited sense described above) but needs a whopping $8bn dollars of liquidity? You bet your ass it’s odd (and FTX may be bankrupt or bankrupt-ish already, according to Bloomberg). If FTX is solvent, why can’t it get someone to lend it the liquidity it needs? Maybe it can, and it will just take time. Perhaps the problem is that even though loaning FTX the money would be a smart financial move, no one with $8bn wants the reputational risk of dealing with Bankman-Fried, who, as noted, might be a major jerk. Also, lenders might not believe FTX’s books are accurate, given the history of, erm, poor internal labelling of bank-related accounts.Can Bankman-Fried’s suggestion that higher-than-thought customer leverage led to the liquidity crunch withstand scrutiny? Yes, but a much simpler explanation is available: that FTX didn’t have enough liquidity because it made a dumb and grossly immoral loan to Alameda. There is a lot we still don’t know. One good readMurdoch vs Trump. More

We wrote on Wednesday about the era of “mortgage dominance”, and how fears home loans were starting to hem in central banks — at least in some countries. It’s a topic we think is about to go Taylor Swift-big very soon. Lo and behold, a new report on “the risk of mortgage defaults in a global housing downturn” has landed in our inbox, courtesy of Goldman Sachs economist Yulia Zhestkova.The report mostly focuses on how rising mortgage rates, under-pressure property prices and delinquencies might lay out in the English-speaking major G10 economies. A bit Anglosphere-centric, but there are some token Scandinavian references [Ed: we get it, you’re from Norway] and it makes sense to limit the universe of analysis to make it at least vaguely digestible.Goldman’s main conclusion will not surprise any FTAV readers. While the US is somewhat protected by the prevalence of long-term fixed rate mortgages, and Australia and New Zealand are vulnerable to payment shocks, the UK looks the diciest (but at least not doomed):Overall, we see a relatively greater risk of a meaningful rise in mortgage delinquency rates in the UK. This reflects the shorter duration of UK mortgages, our more negative economic outlook, and the bigger sensitivity of default rates to downturns. However, even in the UK, our European economists expect that the skew of the payments shock towards wealthier households — which have accumulated significant excess savings during the pandemic — should mitigate the economic effects of the surge in UK mortgage rates.Goldman Sachs focuses on four risks: — The shock from rising interest rates— The danger from rising unemployment— Whether households default on loans because of negative equity— The overall quality of mortgage underwritingOn the last risk factor, Goldman has some good news. It reckons that mortgage credit quality is “robust”, thanks to lasting memories from the global financial crisis, stricter regulations and regular stress tests of bank loan books. Zhestkova is also optimistic that strategic defaults by underwater mortgage holders is a minimal risk. While house prices are declining (and have been for some time in places like New Zealand), a 10 per cent fall in home prices tends to increase mortgage delinquencies by less than 10 basis points in Australia, New Zealand, Canada and the UK. Even in the US — where there isn’t full recourse to anything but the home in question — “jingle mail” isn’t actually a big factor. But the impact of soaring interest rates is going to bite bigly in economies with a lot of mortgage debt, and especially in those countries where most households borrow through floating-rate home loans.

In Australia and New Zealand, over half of all mortgages will reset to higher rates in 2023, and in the UK about 40 per cent will, according to Goldman Sachs. Norwegians, look away now.

In Norway, people are at least more sheltered by strong welfare net should unemployment start to rise markedly. Other countries are not so lucky.The Goldman Sachs report estimates that a 1 per cent rise in a country’s unemployment rate tends to lift the mortgage delinquency rate by as much as 20 bps in the UK. Elsewhere it is not quite as acute, but income shocks tend to have a “persistent” impact, Goldman notes.

This is (thankfully) not another 2008. But given the recent ramp-up in house prices in many countries, the scale of the interest rate shock and what is likely to be an economic downturn in many places, property doesn’t feel safe as houses right now. More

The Covid-19 pandemic has set off an epidemic of talk about restraint in executive pay. And rightly so. As the crisis engulfed companies, their workers and the country, there was much discussion about “solidarity”, “social licence” and “sharing the pain”. As Richard Buxton, fund manager at Jupiter, said at the time: “A sensible board would be asking management . . . to make some sacrificial gestures in terms of pay.” And, to some extent, they did. Around half of FTSE 100 bosses had their salaries frozen, while a chunk of blue-chip companies cut, suspended or cancelled bonus payouts.What now? The UK has moved swiftly from Covid crisis to energy crisis to cost of living crisis to fiscal crisis. Overlapping and interrelated shocks, both economic and otherwise, are likely to make the convoluted process of determining executive pay for corporate leaders even more tortured than usual.Senior pay packets have recovered rather nicely from the bout of pandemic-induced austerity. PwC figures for last year’s season of annual general meetings show CEO pay up 23 per cent overall year on year to £3.9mn. Share prices and earnings had bounced back after the 2020 hit. The rise in pay was mainly down to bonuses: average payouts at 86 per cent of the maximum on offer were well above the pre-Covid average of just over 70 per cent. Either everyone has done a bang-up job, or the post-Covid boom in many sectors and easier targets at two-fifths of companies had a lot to do with it.The turbulence of 2020 will still be keenly felt in next year’s annual general meetings, however, thanks to the mess that is long-term incentive plans. These three-year schemes offer up to a maximum multiple of salary, usually three to four times, in shares. Awards granted at the rock-bottom prices in the panicked days of the early pandemic could translate into egregiously-high absolute numbers on vesting next year.The Investment Association, which represents British fund managers, has long warned about the potential for “windfall gains”. It generally prefers companies to cut awards at the time of issue where share prices have dropped sharply.Most boards didn’t in 2020, putting the onus on remuneration committees to exercise discretion now. Previous controversies should focus minds: businesses exposed to commodities prices have encountered problems in the past. Notoriously, there was the proposed £110mn payout to Persimmon’s boss on targets set before the government’s Help to Buy programme boosted the housebuilders.Prising apart managerial influence from a rising market or sheer good luck is a thankless task. That, combined with another year where setting sensible, long-term performance targets looks challenging, could and should prompt more companies to think about switching to grants of restricted stock: lower, longer-term rewards in shares that eliminate target-setting complexity and should function better in the volatility of repeated crises.Meanwhile, those setting salaries and packages next year could also feel the echoes of Covid. “I think there is a difference,” says Roger Barker, director of corporate governance at the Institute of Directors. “The pandemic was seen as a truly exceptional situation. This is very challenging but it’s within the parameters of difficult situations for business in the past.”Still, the IA this week suggested that boards should “ensure the executive experience is commensurate” with employees, shareholders, suppliers and customers, adding that the disproportionate impact of rising food and energy prices on lower-paid workers should mean “additional restraint” at senior levels.“Learn from Kwasi’s mistakes,” says Buxton, referring to former UK chancellor Kwarteng’s tax cuts for the wealthiest in the “mini” Budget. “A cost of living crisis . . . is not the time to reward the C-suite with inordinate largesse.”It isn’t. The lowest income households were, as it happens, quite well protected in the pandemic year, thanks to the £20 per week uplift to universal credit and the furlough programme. But they have suffered more since. Overall, median incomes this year and next are set to fall by the most, or close to it, on record, according to Resolution Foundation, with the poorest bearing the brunt.If the pandemic notions of solidarity and alignment were genuine, rather than just a function of outright panic, then now is the time to show [email protected] More

SINGAPORE (Reuters) – The dollar languished on Friday after U.S. inflation data came in cooler than expected, raising market hopes that inflation may have peaked and that the Federal Reserve will begin scaling back its hefty interest rate increases.Figures showed that the consumer price index rose 7.7% year-on-year in October, the smallest gain since January and below forecasts of an 8% increase.The dollar tumbled overnight after the release, and recorded its worst day against the Japanese yen since 2016, having fallen 3.7%. It has since clawed back some of those losses and last rose 0.53% to 141.69 yen.Sterling saw its best daily gain since 2017, jumping over 3% overnight, along with the Aussie, which surged close to 3%, its largest since 2011.Against a basket of currencies, the U.S. dollar index slumped more than 2% overnight, the most in over a decade. It last stood at 108.06.”The overnight moves in the dollar were pretty sharp … I do think the results in the U.S. CPI for October will support the case for a downshift in the FOMC rate hike in December,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY).”The Japanese government officials will certainly be happy about the drop in dollar/yen overnight … it was mainly driven by the sharp drop in U.S. Treasury yields.”U.S. Treasury yields moved decisively lower overnight as investors revised down their expectations of where U.S. rates could peak, with the benchmark 10-year Treasury yield slipping below 4% to its lowest in over a month. [US/]In early Asia trade, the dollar was fighting to recoup some of its losses, with the euro last 0.31% lower at $1.0179, after rising nearly 2% overnight. The kiwi edged 0.43% lower to $0.6001, following a 2.4% overnight gain.The pound clung to most of its overnight gains and was last down 0.32% at $1.1673, while the Aussie slipped 0.42% to $0.65915.Fed funds futures show that markets are pricing in a 71.5% chance of a 50-basis-point rate increase and a 28.5% chance of a 75 bp increase at the Fed’s December meeting, as compared to a nearly-evens chance a week ago.”There were flickers of encouragement in the October CPI release, but this pattern would need to be repeated in coming months for confidence to grow that inflation will moderate towards trend over the Fed’s forecast horizon,” said economists at ANZ.Also at the top of investors’ minds on Friday was the ongoing turmoil in the crypto world after crypto exchange FTX’s fall from grace.FTX is scrambling to raise about $9.4 billion from investors and rivals, a source told Reuters. Various institutional investors and officials have also since spoken out on the matter.Cryptocurrencies remained under pressure, with FTX’s native token, FTT, last 5% lower at $3.537, having fallen nearly 90% month-to-date.Bitcoin fell 0.3% to $17,501, after plunging below $16,000 for the first time since late 2020 earlier in the week. More

(Reuters) -A federal judge in Texas on Thursday ruled that President Joe Biden’s plan to cancel hundreds of billions of dollars in student loan debt was unlawful and must be vacated, delivering a victory to conservative opponents of the program.U.S. District Judge Mark Pittman, an appointee of former Republican President Donald Trump in Fort Worth, ruled in a lawsuit backed by the Job Creators Network Foundation on behalf of two borrowers.The debt relief plan had already been temporarily blocked by the St. Louis-based 8th U.S. Circuit Court of Appeals while it considers a request by six Republican-led states to enjoin it while they appealed the dismissal of their own lawsuit.Biden’s plan has been the subject of several lawsuits by conservative state attorneys general and legal groups, though plaintiffs before Thursday had struggled to convince courts they were harmed by it in such a way that they have standing to sue.Pittman in a 26-page ruling wrote that the HEROES Act – a law that provides loan assistance to military personnel and that was relied upon by the Biden administration to enact the relief plan – did not authorize the $400 billion student loan forgiveness program.”The Program is thus an unconstitutional exercise of Congress’s legislative power and must be vacated,” Pittman wrote.The White House and representatives for the plaintiffs did not respond immediately to requests for comment.The non-partisan Congressional Budget Office in September calculated the debt forgiveness would eliminate about $430 billion of the $1.6 trillion in outstanding student debt and that over 40 million people were eligible to benefit.The plan, announced in August, calls for forgiving up to $10,000 in student loan debt for borrowers making less than $125,000 per year, or $250,000 for married couples. Borrowers who received Pell Grants to benefit lower-income college students will have up to $20,000 of their debt canceled. More

TOKYO (Reuters) -Japan’s top currency diplomat Masato Kanda said on Friday he was closely watching foreign exchange market moves with a sense of urgency and that authorities were ready to take action, if needed.Kanda was speaking after weaker-than-expected U.S. consumer price data lowered market expectations for aggressive Federal Reserve interest rate hikes, sending the dollar falling by 4 yen overnight versus the Japanese currency.”We’ll closely watch currency moves and respond appropriately if necessary,” Kanda, vice finance minister for international affairs told reporters at the ministry.The dollar fell sharply as U.S. consumer prices rose less than expected in October. The Japanese yen at one point climbed by its biggest single-day rise since 2008, hitting 140.9350 to the dollar.On Friday morning in Tokyo, the dollar was fetching around 141.57 yen.The yen’s sharp rises came after it fell by more than 20% against the dollar this year, prompting authorities to step into the market in September to prop up the yen for the first time since 1998. They intervened further last month when the dollar strengthened to 32-year high close to 152 yen.In the past, Japan’s interventions were conducted mostly to weaken the yen and support the export sector, by buying the dollar and selling the yen.The latest dollar falls may complicate Japan’s response to the currency market.The U.S. Treasury Department on Thursday said no major trading partner manipulated its exchange rates to gain unfair competitive advantage through June 2022. The bulk of interventions seen were aimed at strengthening currencies, not weakening them, Treasury said in a semi-annual report.”I understand that it describes (Japan’s currency policy) as highly transparent,” Kanda added. More

The benchmark interest rate has risen from a low of 0.25% in July 2021, as annual inflation hit 8.28% as of October. Peru’s central bank confirmed previous guidance, saying it expects inflation to come down to its target band of between 1% and 3% by the second half of 2023. Peru is the world’s No. 2 copper producer and has ranked this century among the fastest growing economies in the region. Still, concerns about a global slowdown have weighed over the Andean economy. Peru’s finance ministry recently lowered its growth expectations to between 2.7% and 3% from a previous estimate of 3.3%. More

WASHINGTON (Reuters) -Switzerland-based Glencore (OTC:GLNCY), China and Chad’s other creditors have reached an agreement in principle on restructuring the African country’s nearly $3 billion in external debt, a source close to the negotiations said on Thursday.The deal, which should be finalized in coming days, will be the first completed under a framework created by the Group of 20 major economies and the Paris Club in late 2020 to help poor countries weather the COVID pandemic, as well as China’s first participation in joint debt treatment deal with other creditors, said the source, who was not authorized to speak publicly.Chad’s bilateral creditors – China, France, India and Saudi Arabia – agreed several weeks ago that the country did not require debt relief at the moment given higher oil prices that boosted the revenues of the oil-producing nation, but pledged to reconvene and offer Chad help if needed.Glencore, a major private creditor, agreed late in October or early November to join the other creditors, the source said. Chad owes one third of its external debt to commercial creditors, and almost all of that to Glencore in oil-for-cash deals dating back to 2013 and 2014.Chad, the first country to ask for a debt deal under the G20 common framework, had struck an initial agreement with creditor nations in June 2021, but then struggled to finalize an agreement with Glencore and other private creditors.The agreement calls for Chad’s creditors to reprofile, or reschedule, Chad’s debt in 2024, the last year of its current $572 million Extended Credit Facility (ECF) with the International Monetary Fund (IMF), to ensure that its debt level remains below the threshold of “moderate risk of debt distress.” “It’s excellent news, in terms of a breakthrough in the mindset of different stakeholders,” said the source, adding that the agreement could pave the way for a few other heavily indebted countries to seek help.It was not immediately clear how much of Chad’s debt – which stood at around $2.8 billion, or 24.2% of gross domestic product at the end of 2020 – would be extended or for which time period, with those details to be worked out later, depending on oil prices and other factors, the source said.Together with Ethiopia and Zambia, Chad is one of three countries to have sought a debt restructuring under the G20 initiative, but progress toward an agreement has been glacial.World Bank and IMF officials, as well as Western finance officials, have grown increasingly frustrated about what they see as foot-dragging by China in addressing debt issues, despite its role as the world’s largest sovereign creditor.The agreement now reached marks progress and reflects growing trust among creditors, including China, as they negotiate on debt issues, the source said.Chad’s creditor committee is co-chaired by France and Saudi Arabia.No comment was immediately available from the Paris Club, Glencore. More